Broking firms seek cut in transaction cost

The sharp upturn in the Indian equity markets since March 2009 with impressive surge in volumes has helped substantial sequential surge in revenues of the broking firms. Earlier, they were affected by global financial meltdown, which lead to crash in markets and volumes. Smaller broking house took greater hit, as they struggled to meet their margin requirements due to liquidity constrain.

Nevertheless, the fortunes of brokerage companies have revived along with the improvement in stock prices over the last three months. Increasing turnover in cash and derivative segments as well as fund-raising plans of India Inc spells good news for these companies. But still raising cost of trading is putting pressure on margins. Hence lowering statutory duties to bring down cost tops the agenda of budget wish list.

Industry Expectations

Reduce Security transaction tax (STT) from current level: The Finance Minister during Union Budget 2004-05 introduced STT. Accordingly, all investors dealing in the stock market pay a fixed STT of 0.125% for every transaction in cash for delivery of shares. The STT is levied both for buyers as well as sellers. Hence the broking firm expects the SST to be reduced from current levels.

Rebate under Section 88E of the Income Tax Act: to allow STT as rebate against tax liability under Section 88E of the Income Tax Act as allowed prior to April 2008. The rebate was discontinued as the tax outgo from broking firms was assumed to be low and most set off STT against their business income.

Rationalization of stamp duty charges: Currently stamp duty charges for share market transactions differ from state to state. Brokers expect the current budget will throw some focus on rationalizing the stamp duty charges across the country.

Removal of Commodity transaction tax (CTT): To remove CTT for the future growth of the commodity market. The government had introduced CTT on the lines of Securities Transaction Tax (STT). As per the proposal, a seller would pay 0.017% CTT on option premium if he sells an option in goods or an option in commodity derivative. The purchaser would be charged 0.125% on the settlement price of the option if he sells an option in goods or option in commodity derivative, where option is exercised. Though CTT has been permitted, they are yet to be notified, and hence not yet been levied.

Analyst Expectations

SST remains as a turnover tax (whether profit or loss) and not tax on income. Day traders and arbitrageurs, who generally trade on thin margins, are affected the most as STT raise their transaction cost. Any further hike in SST could prove negative and damper market sentiments. Removal or reduction in STT will pep up the stock market. Asset pricing is also likely to go up with reduction in transaction cost.

The Union Budget 2008-09 removed the rebate on STT and qualified the same for deduction under Sec 36. This has hit many investment companies and Brokerage houses, which trade in proprietary accounts, as their tax incidence has increase compared to the earlier structure. We expect the Government to maintain its status quo in this regard.

Currently stamp duty charges for share market transactions differ in each state. In some cases brokers are subject to double taxation. Hence the rationalization of stamp duty charges will bring down the trading cost significantly.

The Commodity Transaction Tax (CTT) was introduced more than year ago but was not imposed. The CTT was not levied due to stiff resistance from commodity exchanges and Forward Markets Commission (FMC). However the removal of the same will help in future growth of commodity market and avoid encouraging of grey market operations in the commodity trading business.

The strong revival in the market has adds cream to the stock and commodity broking sector. The risk aversion has come down significantly, which coupled with improving economic fundamentals augurs well.

Broking firms are hoping the Union Budget shall not levy extra burden on them or investors by way of additional taxes. Instead they seek reduction in the overall transaction cost, which should spur investment and trading in securities.